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EV tax credit rules tighten restrictions on foreign-made batteries

Valerie Yurk, CQ-Roll Call on

Published in Business News

The Treasury and Energy departments on Friday proposed rules that would establish which electric vehicles will qualify for tax credits under new thresholds aimed to limit battery ingredients that are made in or sourced from adversaries like China.

The proposal falls short of a strict interpretation of last year’s climate spending law, which lawmakers such as Sen. Joe Manchin III, D-W.Va., have said is necessary to fight Chinese dominance of the battery market. The climate law seeks to wean the United States from relying on “foreign entities of concern,” which include companies owned by, controlled by or based in China, Russia, North Korea or Iran.

Biden administration officials said the tax credit has been key for boosting electric vehicle adoption. DOE Deputy Secretary Dave Turk noted on a call to reporters that EV sales reached 10 percent of new car sales last month, up from 6.7 percent at the same time last year.

“By building this industry in America with American workers, the United States is making critical investments in our long-term economic growth and productivity,” Treasury Deputy Secretary Wally Adeyemo said in a call with reporters. “Automakers have already adjusted the supply chain to ensure buyers are eligible for these credits, and are continuing to do so.”

Under the climate law, half the $7,500 EV tax credit can be awarded for vehicles meeting sourcing requirements for minerals used in their batteries, which must be extracted or processed domestically or in a country with which the U.S. has a free trade agreement. The other half, or $3,750, requires that the batteries be manufactured or assembled in North America.

The proposed rules aim to resolve outstanding questions unanswered by the law itself. Automakers, who must adhere to escalating annual benchmarks for battery components sourced from the United States or friendly nations if they want their vehicles to qualify, have wondered how strict the requirements will be for tiny amounts of tough-to-track minerals that may originate with a foreign entity of concern.

Treasury is proposing a “temporary transition rule” for the commingling of these small amounts that would identify tax credit-eligible batteries by serial number or other identification system that will allow them to be tracked as they’re installed in certain vehicles.

Another temporary transition rule proposed by Treasury would exempt certain “low value” materials from the foreign entities of concern provisions until 2026, giving the industry extra time to develop systems to trace those materials. The department has not yet determined, however, which materials would be considered “low value.”

Manchin decried the rules in a statement, claiming that President Joe Biden is allowing his administration to “route our essential supply chains through China.”

 

“The [climate law] clearly states that consumer vehicles are ineligible for tax credits if ‘any of the applicable critical minerals contained in the battery’ come from China or other foreign adversaries after 2024,” Manchin said. “But this administration is, yet again, trying to find workarounds and delays that leave the door wide open for China to benefit off the backs of American taxpayers.”

Automakers, who have been calling for eased restrictions on trace amounts of critical minerals from foreign entities of concern, have largely welcomed the rules. John Bozzella, president of industry group Alliance for Automotive Innovation, wrote in a blog post that the rules “recognize the complexity” of the EV transition as well as “the challenges facing automakers with some good balance.”

“Day one verdict: Clarity for automakers. Finally,” Bozzella wrote.

DOE’s proposed rule issued Friday answers some questions about which kinds of, as well as how many, associations with “foreign entities of concern” would disqualify a company’s vehicles.

The proposal would bar tax credits for vehicles with batteries produced by entities incorporated in, headquartered in or performing relevant battery production activities in a covered nation. For example, any production occurring in China, whether through a Chinese-incorporated firm or not, would be subject to the country’s jurisdiction and therefore considered an “entity of concern.”

It would also bar entities in which a government of the four identified nations holds a 25 percent or more voting interest, board seat or equity interest. That includes ownership by dominant political parties, like the Chinese Communist Party, and subnational governments and senior officials.

The first deadline for automakers begins on Jan. 1, when vehicles containing any battery components that are manufactured by a foreign entity of concern will not receive the tax credit. Starting in 2025, eligible vehicles may not contain any critical minerals that were extracted, processed or recycled by a foreign entity of concern.

(Laura Weiss and David Jordan contributed to this report.)


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